Question

Liability Insurance Company writes a substantial amount of commercial liability insurance. A large construction company requests $100 million of liability insurance to cover its business operations. Liability Insurance has a reinsurance contract with Bermuda Re that enables the coverage to be written immediately. Under the terms of the contract, Liability Insurance pays 25 percent of the losses and retains 25 percent of the premium. Bermuda Re pays 75 percent of the losses and receives 75 percent of the premium, less a ceding commission that is paid to Liability Insurance. Based on the preceding,

A. What type of re-insurance contract best describes the re-insurance arrangement that Liability Insurance has with Bermuda Re?
B. If a $50 million covered loss occurs, how much will Bermuda Re have to pay? Explain.
C. Why does Bermuda Re pay a ceding commission to Liability Insurance?

Answer 1

Following are the solution to the given points:

Step-by-step explanation:

For point A:

Its reinsurance scheme which Liability Coverage through Bermuda Re better defines. In this form, primary insurers and reinsurers decide, based on percentage or allocation, to divide the profits and losses.

For point B:

Bermuda Re is paying 75% of the losses. When a protected loss of $50 million comes in Bermuda Re was indeed paying =75% of 50 million = 37.5 million.

For point C:

Bermuda Recharges a responsibility insurance ceding commission and covers the costs sustained in the business through writing.